- July 29, 2022
- Posted by: Ramkumar
- Category: Posts
What Is Double Irish Dutch Sandwich
The value of a company is a function of its after-tax operating margins, growth, risk, and return on invested capital.
Put, 𝐯𝐚𝐥𝐮𝐞 = 𝐞𝐛𝐢𝐭(𝟏-𝐭)(𝟏-𝐠/𝐫𝐨𝐢𝐜)*(𝟏+𝐠)/(𝐰𝐚𝐜𝐜-𝐠).
Thus, companies to 𝐦𝐚𝐱𝐢𝐦𝐢𝐳𝐞 𝐬𝐡𝐚𝐫𝐞𝐡𝐨𝐥𝐝𝐞𝐫 𝐯𝐚𝐥𝐮𝐞 seek to save taxes. Companies like Google and Apple, in addition to their high growth and premium pricing, 𝐡𝐚𝐯𝐞 𝐫𝐞𝐬𝐨𝐫𝐭𝐞𝐝 𝐭𝐨 𝐭𝐚𝐱 𝐚𝐯𝐨𝐢𝐝𝐚𝐧𝐜𝐞 𝐦𝐞𝐜𝐡𝐚𝐧𝐢𝐬𝐦𝐬 to improve their share price.
For instance, Google used a legal tax technique – 𝐃𝐨𝐮𝐛𝐥𝐞 𝐈𝐫𝐢𝐬𝐡 𝐃𝐮𝐭𝐜𝐡 𝐒𝐚𝐧𝐝𝐰𝐢𝐜𝐡 till last year that enabled it to pay nil taxes for its income in Europe.
For those who have not heard of this tax technique, what Google did was that it creates a 𝐬𝐮𝐛𝐬𝐢𝐝𝐢𝐚𝐫𝐲 𝐢𝐧 𝐈𝐫𝐞𝐥𝐚𝐧𝐝 𝐟𝐨𝐫 𝐢𝐭𝐬 𝐢𝐧𝐜𝐨𝐦𝐞 𝐢𝐧 𝐔𝐊/𝐄𝐮𝐫𝐨𝐩𝐞 𝐭𝐨 𝐩𝐚𝐲 𝟏𝟐.𝟓% 𝐭𝐚𝐱 𝐢𝐧𝐬𝐭𝐞𝐚𝐝 𝐨𝐟 𝟑𝟓% 𝐭𝐚𝐱 that it has to pay if it repatriates its profits back to the US.
Then to evade a 12.5% tax, 𝐆𝐨𝐨𝐠𝐥𝐞 𝐜𝐫𝐞𝐚𝐭𝐞𝐝 𝐚𝐧𝐨𝐭𝐡𝐞𝐫 𝐬𝐮𝐛𝐬𝐢𝐝𝐢𝐚𝐫𝐲 𝐢𝐧 𝐈𝐫𝐞𝐥𝐚𝐧𝐝 𝐰𝐢𝐭𝐡 𝐚 𝐜𝐨𝐧𝐭𝐫𝐨𝐥𝐥𝐢𝐧𝐠 𝐩𝐫𝐞𝐬𝐞𝐧𝐜𝐞 𝐢𝐧 𝐭𝐡𝐞 𝐂𝐚𝐲𝐦𝐚𝐧 𝐈𝐬𝐥𝐚𝐧𝐝𝐬. As per Irish laws, if another jurisdiction controls an Irish entity, the profits will get taxed in that jurisdiction. So, as the effective tax rate in the Cayman Islands is nil, Google didn’t pay any taxes.
However, 𝐆𝐨𝐨𝐠𝐥𝐞 𝐡𝐚𝐝 𝐭𝐨 𝐩𝐚𝐲 𝐰𝐢𝐭𝐡𝐡𝐨𝐥𝐝𝐢𝐧𝐠 𝐭𝐚𝐱 𝐟𝐨𝐫 𝐢𝐭𝐬 𝐨𝐭𝐡𝐞𝐫 𝐬𝐮𝐛𝐬𝐢𝐝𝐢𝐚𝐫𝐲 𝐢𝐧 𝐈𝐫𝐞𝐥𝐚𝐧𝐝 that received profits from its first Irish subsidiary. To prevent that, 𝐆𝐨𝐨𝐠𝐥𝐞 𝐬𝐞𝐭 𝐮𝐩 𝐚 𝐬𝐮𝐛𝐬𝐢𝐝𝐢𝐚𝐫𝐲 𝐢𝐧 𝐭𝐡𝐞 𝐍𝐞𝐭𝐡𝐞𝐫𝐥𝐚𝐧𝐝𝐬 𝐚𝐬 𝐃𝐮𝐭𝐜𝐡 𝐚𝐧𝐝 𝐈𝐫𝐢𝐬𝐡 𝐡𝐚𝐯𝐞 𝐚𝐧 𝐚𝐫𝐫𝐚𝐧𝐠𝐞𝐦𝐞𝐧𝐭 𝐰𝐡𝐞𝐫𝐞 𝐭𝐡𝐞𝐲 𝐚𝐠𝐫𝐞𝐞 𝐧𝐨𝐭 𝐭𝐨 𝐭𝐚𝐱 𝐈𝐏 𝐫𝐞𝐯𝐞𝐧𝐮𝐞𝐬 𝐟𝐥𝐨𝐰𝐢𝐧𝐠 between two countries. Thus, the first Irish subsidiary routes its European revenues to its Dutch subsidiary. Then, the Dutch subsidiary routes the income back to its second Irish subsidiary making its effective tax rate zero.
Though the above tax arrangement is legal, lawmakers and the public perceived it unethical, prompting Google to abandon the above agreement.
In my view, Google’s actions were in its best shareholder interest and legal, which prompts a more critical question on 𝐡𝐨𝐰 𝐜𝐨𝐦𝐩𝐚𝐧𝐢𝐞𝐬 𝐝𝐞𝐜𝐢𝐝𝐞 𝐰𝐡𝐢𝐜𝐡 𝐭𝐚𝐱 𝐬𝐜𝐡𝐞𝐦𝐞𝐬 𝐚𝐫𝐞 𝐞𝐭𝐡𝐢𝐜𝐚𝐥 𝐚𝐧𝐝 𝐧𝐨𝐭?